What does monopoly mean monos one polein seller Not a new phenomenon Thales Aristotle Necessary conditions Single seller Examples most public utility companies and patented drugs ID: 491603
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Slide1
Monopoly
What does monopoly mean? “monos” = one “polein” = sellerNot a new phenomenon Thales, AristotleSlide2
Necessary conditions
Single seller Examples: most public utility companies and patented drugs.No close substitutesMarket power
The firm can increase price and not lose all of its customers or demand (D)is downward sloping. The monopolist is a price maker.Note: Since we have only one firm market demand = firm demand
Barriers to entryPatents, licenses, regulation, economies of scale, etc…Non-price competitionAdvertisement, promotions, brand management, etc…Slide3
The Statue of LibertySlide4
What creates monopolies?
Legal restrictions (e.g. patents)Economies of scaleControl of essential resources
Technical superiority Deliberately created barriersSlide5
Legal Restrictions
Patents – awards the inventor the exclusive right to decide who produces the good for 20 years.Michael Jackson’s patent [watch here
]Benefits / CostsTrademarksPatent Trolls20% of our genes are now patented [read here
] (ACLU sues over patents on breast cancer genes)Slide6
LicensingSlide7
Economies of Scale
Quantity per period
Long-run
average cost
Cost per unitSlide8
Control of Essential Resources
China is a monopoly supplier of Pandas to the world’s zoos. [panda cam]Alcoa was the sole U.S. maker of aluminum for a long period of time because it controlled the supply of bauxite.DeBeers (cartel) controls the supply of diamonds.
http://www.guardian.co.uk/business/2009/jul/24/debeers-results-diamonds-recession-impact (due to financial crisis profits decreased 99% for 2010!)Geographical control (restaurants, zoos, movie theaters, grocery stores, etc…) e.g. Busch GardensSlide9
Technical Superiority
Intel controls 80% of the market for microchips. [Intel ad][2]Google controls 76% of the search market [read here] Slide10
Deliberately created barriers
Predatory pricing - keep prices low to drive competition out (e.g. Walmart). http://blog.mises.org/archives/005255.asp
(Microsoft accused of predatory pricing).Excess capacity - flood the market with product, which has the effect of driving prices down, and eliminating competition.
Limit pricing - price below cost to prevent new entry (e.g. Alcoa)Slide11
Note that
P ≠ MR (true for all firms with market power)Why? To sell more the monopolist has to lower prices. However, this new lower price is for all quantity that is sold. Example:
Price and MRSlide12
Profit Maximization (M)Slide13
Efficiency (M)Slide14
Drawbacks from Monopoly
Restricted outputHigher pricesWelfare loss to society (DWL)Equity costSlide15
Why the DWL may be smaller?
Economies of scale.Public scrutiny. Predatory pricing to discourage new entry.Harberger’s
study Slide16
Why DWL may be higher?
Gordon Tullock’s answer: THE WELFARE COSTS OF TARIFFS, MONOPOLIES, AND THEFT (1967)
Every time the government restricts output welfare lossMonopolies devote resources to preserve their power (lobbying, campaign contributions, etc.)
DUP – Directly Unproductive Activity
Rent-Seeking: companies try to influence public policy that will benefit them at the expense of the taxpayer.At the end of the day, the loss to society is much higher.Slide17
Why DWL may be higher?
Monopolies are regulated by the Government ( as soon as natural monopoly is formed, the next thing that is created is a public utility commission that regulates it). So MC goes up.Stigler tracked the careers of public commissioners and discovered that 80% of public commissioners after 4 year contract go to work for the industry they regulated.
Stigler’s Capture Theory.Advertisement – multi-billion dollar campaigns for trivial differentiation higher prices restricts output.Slide18
Price Discrimination